Shares in clothing-to-homewares colossus Next (NXT) rally 8.2% to £55.46 as the company raises its full year profit before tax (PBT) guidance by £10m to £727m.
Last month, the high street stalwart left its year-to-January 2019 guidance unchanged, warning there was a risk sales banked in July could be pulled forward sales, boosted by the UK’s prolonged summer heatwave. This hasn’t proved to be the case, hence today’s surprise upgrade and positive share price reaction.
STURDY PERFORMER
Given the numerous headwinds facing the retail sector, Simon Wolfson-led Next’s performance in the first half to 28 July was solid, with full price sales up 4.5%, ahead of the 2.2% sales guidance issued in May.
‘As it turned out, we did not experience any material loss of sales in August or early September, so we are now raising our central guidance for full year profit before tax by £10m to £727m,’ says Wolfson in his incredibly detailed CEO’s statement. ‘This is broadly in line with last year’s profit of £726.1m and would deliver a growth in earnings per share of 5%.'
Yet the outlook remains downbeat, Wolfson conceding ‘the UK retail market remains volatile, subject to powerful structural and cyclical changes.
'Many of these headwinds have not abated. As expected, sales in our stores (which now account for just under half of our turnover) continue to be challenging. We believe the over-performance in the first half was flattered by the unusually warm summer and we remain cautious in our outlook for the rest of the year.’
CHANNEL SHIFT CONTINUES APACE
As is becoming the norm, the half confirmed the inexorable channel shift to the web, with Next’s retail sales down 6.9% and online sales surging 16.8% higher. The good news is the rate of decline in Next’s traditional retail business isn’t getting worse, whilst the improvement of the online business is only strengthening, boosted by the growth of its online overseas operation and UK third-party brands business, LABEL.
Wolfson explains: ‘We are often asked: “What will the high street look like in 10 years’ time?” The only honest answer to this question is that we do not know; we can see the general direction of travel but can predict neither the speed nor endpoint for the changes that lie ahead.
'Our approach is to build as much flexibility into our operations and cost base as is possible to minimise the negative effects of falling retail sales and maximise opportunities for growth online.
'This means a constant process of reinvention and experimentation within our business, whilst preserving the integrity of our brand, the calibre of our people, quality of the operations and the profitability of the group.
'The task remains extremely challenging, but with more than half of our sales now coming from our online and finance businesses, it feels like we are moving in the right direction.'
Significantly, Next’s update also includes a 10 page Brexit analysis, outlining the risks the retailer faces as a result of a no-deal withdrawal from the EU. As a response to the uncertainty, Next has hedged its exposure to the pound for products it intends to sell up to January 2020, so does not expect any cost price inflation over this period, irrespective of how the currency moves.
THE EXPERTS’ VIEW
Russ Mould, investment director at AJ Bell, says ‘a big component of successfully heading up a listed company is expectations management. The game of under-promising and over-delivering is one that Next chief executive Simon Wolfson typically plays very well.
‘Despite reporting a strong start to summer trading at the beginning of August, the clothing retailer left guidance for the year to January 2019 unchanged. Its justification being the expectation that shoppers had pulled forward purchases of summer clothes and that demand would peter out in August.
‘This has not proved the case and the company now lifts full year profit guidance for a third time. Yet Wolfson again seems to be playing a cautious hand with his outlook.’
Shore Capital reiterates its ‘hold’ rating on the stock. ‘We continue to believe that the shares remain fairly valued for now but the shares should be in focus this morning with the slightly upgraded guidance,’ states the broker.
